Cutting
the Income Tax to 5%: An Affordable Boost to the Economy

BOSTON
· An economic analysis by the Beacon Hill Institute at Suffolk
University finds that the Commonwealth could create thousands of new
jobs and millions of dollars in new investment if, as Governor Mitt
Romney proposes, the legislature would cut the income tax to 5%.
Moreover, the state could increase spending in FY 2005 by 7.57% over
FY 2004 even as it absorbed the loss in tax revenue that the tax cut
would bring about.

BHI bases
its findings on its State Tax Analysis Modeling Program (STAMP).
In December 2003, BHI predicted that FY 2004 tax revenues would be $15.532
billion, relying in part on STAMP to make its forecast. An updated
forecast shows that the actual amount will be $15.746 billion, meaning
that BHI·s December forecast will be within 1.4% of the actual
amount and more accurate than any other recognized forecast made at
that time.

Using
STAMP, BHI finds that, by cutting the income tax to 5%, effective January
1, 2005, the state would experience an immediate rise in employment
of 3,683 jobs and a rise in investment of $7.3 million. Real (inflation-adjusted)
disposable income would rise by $243 million. By 2008, the state
would have 7,885 new jobs, $17.1 million in additional investment and
$469 million in additional disposable income.

The proposed
tax cut would cause FY 2005 tax revenues to be $237.1 million less than
they would have been without the tax cut. In subsequent years, the annual
shortfall would be about $500 million. However, this loss in tax
revenue would be offset by a surge in tax revenues brought about by
an improving economy. FY 2004 tax revenues will exceed FY 2003
tax revenues by about $775 million or 5%. And even with the tax
cut, FY 2005 tax revenues would exceed FY 2004 revenues by $307 million
or 2%.

This would
make it possible for the taxpayers to enjoy the benefits of the tax
cut while allowing the state to increase spending. Using its updated
revenue forecast, BHI finds that the state could increase spending in
FY 2005 by 7.57% even as it cut the income tax rate to 5%, as proposed
by the governor.

In 2000,
Massachusetts voters approved, by a large margin, a ballot measure cutting
the income tax rate to 5% over a period of three years. In 2002,
the state temporarily froze the rate at 5.3% owing to a sharp fall in
tax revenues.

In commenting
on BHI·s findings, David G. Tuerck, Executive Director of the
Institute, said that "the state is now in a position to honor the
will of the voters, as expressed four years ago." Said Tuerck:
"By cutting the tax rate, the state can simultaneously strengthen
the state economy and grow state government at a respectable pace."